3.7 cash flow

Question 1

Profit vs. Cash Flow

Investment = spending on productive assets

Answer 1

Profit = the positive difference between sales revenue and total production costs in a given time period

Cash flow = the movement of money in and out of an organization

Question 2

Relationship btw. investment, profit, and cash flow
- just like what happens when I buy an asset or sell an asset
- taking debt financing

Question 3

How to deal with cash flow problems

Answer 3

• seek different suppliers/cheaper raw materials
• leasing
• improve cash outflows through: requiring cash payments only/improve product portfolio
• seeing new finance sources: overdrafts, sale of assets, government assistance/subsidies

Question 4

REASONS FOR BAD CASH FLOW

Answer 4

Reasons why firms have working capital problems
Credit Control - firm does a bad job in deciding when a customer should have trade credit and how much trade credit they get. If not careful enough then the firm will starthaving bad debt (customer doesn’t pay). One reason why some this is especially difficult that without the customer receiving trade credit, they may not purchase the goods and the firm loses out on a sale.

Collections - firm doesn’t chase up debtors to pay their outstanding debts.

Overtrading - firm tries to grow too quickly.

Overstocking - firm keeps too much stock (inventory). Though stock is a current asset, just sitting on the shelf does not generate any money for the firm. Also, excess stock requires storage which costs money.

Seasonality - certain products have great demand swings depending on the time of year. For example, Christmas trees only happen to be popular right before Christmas. A firm may need to buy a huge amount of trees to have enough to meet the demand of their customers. Do they have enough cash to buy the trees?

Question 5

NET CASH FLOW = INFLOWS - OUTFLOWS

CLOSING BANK BALANCE = OPEN BALANCE + NET CASH FLOW